This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


Harry Browne was an author of over 12 books, a one-time Presidential candidate, and a financial advisor.  The basic portfolio that he designed in the 1980s was balanced across four simple assets, and you can see Harry explain the theory here:

For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes. The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio… It isn’t difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.”

Although the portfolio underperformed stocks, it was incredibly consistent across all market environments with low volatility and drawdowns.  This presents a classic dilemma for investors, particularly professional advisors.  What is the trade-off for being different?  Despite the incredibly consistent performance there are many years this portfolio would have underperformed U.S. stocks or a 60/40 allocation.  Can you survive those periods even if you believe this portfolio to be superior?  See Figure 28.

FIGURE 28 – Permanent Portfolio


Source:  Browne


FIGURE 29– Asset Class Returns, 1973-2013



Source: Global Financial Data

Next to Marc Faber’s allocation that we profile later in the book, this allocation has the highest weighting to gold.  Gold is an emotional topic for investors, and usually they fall on one side or another with a very strong opinion for or against.   We think you should learn to become asset class agnostic and appreciate each asset class for its unique characteristics.  Gold had the highest real returns of any asset class in the inflationary 1970s but also the worst performance from 1982 – 2013.  However, adding gold (and to a lesser extent other real assets like commodities and TIPS) could have helped protect the portfolio during a rising inflation environment.  Gold also performs well in an environment of negative real interest rates – that is when inflation is higher than current bond yields.

The next portfolio we look at just aims to be average, and it turns out that isn’t a bad thing.


This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


“I know that there are good and bad environments for all asset classes.  And I know that in one’s lifetime, there will be a ruinous environment for one of those asset classes.  That’s been true throughout history.” – Ray Dalio, founder Bridgewater Associates

“Today we can structure a portfolio that will do well in 2022, even though we can’t possibly know what the world will look like in 2022.” – Bob Prince, co-CIO Bridgewater Associates

Risk parity is a term that focuses on building a portfolio based on allocating weights based on “risk” rather than dollar weights in the portfolio.  While the general theory of risk parity isn’t something particularly new, the term was only coined within the past decade and became in vogue in the past few years. Risk is defined in different ways but volatility is a simple example.  As an illustration, the 60/40 stocks and bonds portfolio doesn’t have 60% of total overall risk weighted to stocks,  rather,  more like 90% since stock volatility dominates the portfolio’s overall total volatility.

Risk parity has its roots in the modern portfolio theory of Harry Markowitz. While introduced in the 1950s, it eventually earned him a Nobel Prize.  The basic theory suggested the concept of an efficient frontier – the allocation that offers the highest return for any given level of risk, and vice versa.  When combined with the work of Tobin, Treynor, Sharpe, and others the theory demonstrates that a portfolio could be leveraged or deleveraged to target desired risk and return parameters. Many commodity trading advisors (CTAs) have also been using risk- or volatility-level position-sizing methods since at least the 1980s.

Ray Dalio’s Bridgewater, one of the largest hedge funds in the world based on assets under management, was likely the first to launch a true risk parity portfolio in 1996 called All Weather.  Many firms have since launched risk parity products.  While the underlying construction methods are different, the broad theory is generally the same.

We are not going to focus too much on risk parity since Bridgewater and others have published extensively on the topic, and you will find several links at the end of this chapter.  Three primer papers to read are “The All Weather Story,” “The Biggest Mistake in Investing,” and “Engineering Targeted Returns and Risks”— all of which can be found on the Bridgewater website.

Bridgewater describes the theory in their white paper “The All Weather Story”:

“All Weather grew out of Bridgewater’s effort to make sense of the world, to hold the portfolio today that will do reasonably well 20 years from now even if no one can predict what form of growth and inflation will prevail. When investing over the long run, all you can have confidence in is that (1) holding assets should provide a return above cash, and (2) asset volatility will be largely driven by how economic conditions unfold relative to current expectations (as well as how these expectations change). That’s it. Anything else (asset class returns, correlations, or even precise volatilities) is an attempt to predict the future. In essence, All Weather can be sketched out on a napkin. It is as simple as holding four different portfolios each with the same risk, each of which does well in a particular environment: when (1) inflation rises, (2) inflation falls, (3) growth rises, and (4) growth falls relative to expectations.”

In another piece, “Engineering Targeted Returns and Risks”, Dalio refers to the simple building blocks he calls market betas (such as U.S. stocks or bonds): 

“Betas are limited in number (that is, not many viable asset classes exist), they are typically relatively correlated with each other, and their excess returns are relatively low compared to their excess risks, with Sharpe ratios typically ranging from 0.2 to 0.3. However, betas are reliable – we can expect they will outperform cash over long time horizons.”

Investors need not view any single asset class in its prepackaged form, meaning, leveraging any single asset class, like bonds, can result in higher returns along with volatility similar to stocks. Many asset classes come with embedded leverage already, and adjusting to a risk level by leveraging or deleveraging assets is neither good nor evil – it just is. (A simple example is that many companies carry debt, so one could view stocks as leveraged already.) More from The All Weather Story”:

“Low-risk/low-return assets can be converted into high-risk/high-return assets. Translation: when viewed in terms of return per unit of risk, all assets are more or less the same. Investing in bonds, when risk-adjusted to stock-like risk, didn’t require an investor to sacrifice return in the service of diversification. This made sense. Investors should basically be compensated in proportion to the risk they take on: the more risk, the higher the reward.”

Combining assets with similar volatility into a portfolio results in a total allocation with more in low-volatility assets (like bonds) and less to high-volatility assets (like stocks).

Many other firms now offer risk parity strategies, and you can track a risk parity index from Salient Partners.  There are a handful of risk parity mutual funds from firms such as AQR, Putnam, and Invesco, although most are very expensive.  A risk parity ETF was filed by Global X but never launched.  The theory is well accepted and adopted by a large cadre of the investment community, but the key question is – “has this strategy simply ridden the wave of a secular trend downward in interest rates?”  Only time will tell.

Below we examine two variations of risk parity.  The first is a risk parity portfolio we proposed back in 2012 while giving a speech in New York City that reflects a broad risk parity style of investing (Figure 25).


FIGURE 25 – Risk Parity Portfolio


Source: Faber PPT, 2012

Why try to divine the actual risk parity allocation when we can just go straight to the source and let Mr. Dalio construct it for us?  The second allocation is the “All Seasons” portfolio Dalio himself suggested in the recent Tony Robbins book Master the Money Game (Figure 26).


FIGURE 26 – All Seasons Portfolio



Source: Master the Money Game, 2014

So how did these two portfolios perform?  Almost identically, which isn’t surprising due to the similar nature of the allocation.


FIGURE 27 – Asset Class Returns, 1973-2013




Source: Global Financial Data


In general, the theory behind risk parity makes a lot of sense with one caveat – the biggest challenge to a risk parity portfolio now is that we are potentially near the end of a 30-year bull market in bonds.  The returns of the actual All Weather fund are better than the allocations above since Bridgewater uses leverage (which is essentially borrowing money to invest more thus magnifying both gains and losses).  You can find a blog post comparing the returns of All Weather to a leveraged Global Asset Allocation portfolio in my article “Cloning the Largest Hedge Fund in the World.”


More background reading:

Diversification and Risk Management, Balancing Betas, Counter-Point to Risk Parity Critiques, – First Quadrant

At Par with Risk Parity?” – Kunz, Policemen’s Fund of Chicago

“I Want to Break Free, The Hidden Risks of Risk Parity Portfolio’s – GMO

Risk Parity – In the Spotlight after 50 Years” – NEPC

Leverage Aversion and Risk Parity”, “Chasing Your Own Tail (Risk)” – AQR

“The Biggest Mistake in Investing”,” Engineering Targeted Returns and Risks” – Bridgewater

Risk Parity White Paper” – Meketa

On the Properties of Equally-Weighted Risk Contributions Portfolios” – Maillard et al.

Demystifying Equity Risk-Based Strategies: A Simple Alpha plus Beta Description”  – Carvalho et al.

Risk Parity Portfolios™: The Next Generation”, “PanAgora risk parity” – PanAgora

The Risk Parity Approach to Asset Allocation” – Callan

Risk Parity for the Masses” – Steiner

Risk Parity in a Rising Rates Regime” – Salient

April Tweets

Performance of Ira Sohn Presenters

I’ve been to a few Sohn conferences over the years, and while a lot of fun & for a good cause, my crazy schedule has led to my pumping the brakes a bit on traveling.  I’ve written about hedge funds and their stock picks more than I care to admit on this blog and in my books.  Below are a few summaries we’ve included from The Idea Farm (data source: AlphaClone) on how tracking today’s presenters through their public stock picks would have performed since 2000.  Not bad!

Click to enlarge



Screen Shot 2015-05-04 at 9.07.36 AM


Screen Shot 2015-05-04 at 9.13.18 AM



Screen Shot 2015-05-04 at 9.14.34 AM


Screen Shot 2015-05-04 at 9.15.13 AM


Screen Shot 2015-05-04 at 9.15.55 AM

Schwab vs. WealthFront vs. Betterment

I attended a fun evening dinner with my friends from FirstTrust this week.  They had a guest speaker who was a political consultant – usually this isn’t my favorite topic – but I joined to have a few glasses of wine then sneak out.  Fast forward a few hours later and I was fascinated with the speaker, who was able to weave policy, investing, and economics into a sort of mash-up of House of Cards and George Soros.  At one point I was asking about the historical tax rates and Republican versus Democrat hair pulling over the subject.  It is interesting to me that taxes as a % of GDP have ranged between 14 and 20% of GDP since 1950.  But politicians are not making bold proposals for 50% or 10% of GDP, but rather very very minor alterations.  The speaker referenced how Obamacare and Keystone pipelines were likewise very minor components of total spending and supply – but essentially it gives politicians something to fight about.  How else will you distinguish yourself from your opponent when you are so similar?

This reminds me of the state of the roboadvisors.  Even though I believe asset allocation ETFs are superior to these separate accounts, the development of the roboadvisors has been a big positive for investors (mainly due to fee compression for the managed account space).   While most of their innovations have been around for awhile, the ability to wrap them in a beautiful offering that people will use is a great benefit to investors.

I wrote a big about this last month in the piece “What a Great Time to be an Investor!“.  I was a little surprised that some of the companies were getting into a catfight over some of the specifics of their offerings, when in my mind they were on the same side of the good fight.  What I failed to realize, was that in a world of very, very similar business models, they need to create the appearance of big differences – otherwise how will they be able to distinguish themselves in a world of cutthroat competition?

A nice article was published today from Liz Moyer at the WSJ looking at the very different allocation proposed by the various advisors when she went through the questionnaire.  While the allocations look very different (one has 9% in cash, another zero,  one has 5% in gold, others zero…you get the drift) how do they perform?

Does it even matter?

Below are the returns and equity curves for the allocations historically back to 1972. (Similar older post here.)  As you can see, it is a rounding error what allocation you choose!  I mean, a total CAGR difference of 0.22%!  I do think that someone eventually will offer tactical roboadvisors instead of everyone just doing MPT, which could seriously stand out from the competition.  Also, what’s up with none of the robos tracking their performance through GIPS?  In a world of expensive US stocks, when is someone going to include managed futures or liquid alts?

If you want to read some more on the subject, I’m happy to send you a free copy of my new book Global Asset Allocation.  Just sign up here and I’ll send you one on Amazon – you just have to promise to write a review when finished!

Click to enlarge below charts






If US Stocks Are Expensive, How Do I Protect Myself?

There is a lot of talk about stocks being expensive, but also a lot of people not really doing anything about it.  Many simply don’t know how to tackle the problem, and others don’t want to think about it at all.  Below, for some perspective, are historical returns to stocks since 1970 and the 10 worst months for the S&P.  On average you’re looking at a 11% decline, and that only happens every four years or so (last was Feb 09).  Many others have produced charts like this, but I wanted to demonstrate the returns and batting average for typical asset classes when it hits the fan for stocks.

First observation is that when US stocks go down, all stocks go down.  It doesn’t matter if you are small cap US, foreign developed or emerging, the high correlation means you all suffer.

Bonds of all flavors do a good job, but you can only count on them a little more than half the time.  Good ol’ 10 year US bonds had the highest median return of any asset during stock drops,  However, the lower maturities have a higher hit rate, and of course cash is king with a perfect batting average, but doesn’t do much to diversify and zag when stocks zig.

Commodities are a coin flip, but also had a monster -28% month,  so also volatile (ditto for gold).  REITs, being stocks, don’t help.

One of the best of course is managed futures (hooray for trend!), but FYI pre-1980s this series is hypothetical.  I would argue that this is one of the biggest areas investors are under-allocated.  I think having trend strategies as a percentage of a stocks/bonds/real assets portfolio is one of the best diversifiers, and anywhere up to 33% allocation is completely reasonable.  I’ve said a number of times that a 1/3 each global stocks, global bonds, and managed futures or trend strategy is really hard to beat.  (or do 25% each and add in real assets.)  Stay tuned for a future post on the subject.

The first figure shows returns of 13 assets when stocks puke.  Figure 2 is the same as Figure 1, just sorted by batting average, from good to bad.

Click to enlarge




Templeton & Stock Valuations

I often say there isn’t a whole lot new in investing.  Charles Dow was using trendfollowing approaches over 100 years ago, and Ben Graham was using valuation metrics for security selection as well.  Robert Shiller created the CAPE ratio to look at stock market level valuations, and this was based on some of Ben’s work on smoothing earnings over longer periods to reduce the noise.

I had not seen this book before – Templeton’s Way with Money: Strategies and Philosophy of a Legendary Investor – published in 2012 (hat tip to reader KH).  The book describes some of the memorandums to clients from Templeton, including a few below on valuation the stock market as a whole (DOW).  Funny to see they were using the equivilent of the Shiller CAPE (20), Tobin’s Q, and the Fed-model to value the market and adjust their equity exposure….






Needless to say, he wouldn’t have too much in US stocks these days….now foreign….charts from dShort




March Tweets

13F Critics, Silenced?

I don’t hear nearly as much from the 13F critics anymore.  Maybe they have simply lost interest, or perhaps the real time performance of the 13F strategies have converted them into believers, who knows.  I’ve been sending out hedge fund profiles each Sunday to The Idea Farm with current holdings and backtests and investors seem to love the updates.

Covered so far:




If you have any fund suggestions let me know!

I thought it would be fun to look back at the generic “World Beta” clone that I haven’t touched since AlphaClone launched many moons ago.  These are not the same funds I would pick today, but hey that’s not a bad list!  Top 5 positions from these funds would have beaten the market 6 of last 7 years in real time…If you pick the most popular amongst these funds the results are even better.

Appaloosa Management

Baupost Group

Berkshire Hathaway

Blue Ridge Capital

Eminence Capital

Greenlight Capital

Lone Pine Capital

Maverick Capital

Tiger Global Management


wb wb2

Stocks are the Most Expensive, Well, Ever

I jabber a lot about valuation metrics here, and I mentioned this one on Twitter the other day.  Its doesn’t need much explanation – the median stock in the S&P 500 is the most expensive it has even been (for as long as we have data).  That’s never a good sign!

If your favorite valuation indicator is not at “the highest ever” , many valuation indicators and now at “the highest ever except 2000”.  That’s not good company unless you are a short seller.

Click to enlarge…

Screen Shot 2015-03-11 at 10.31.38 AM

Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

See NDR Disclaimer at For data vendor disclaimers refer to

Page 6 of 161« First...45678...203040...Last »
Web Statistics